Why Free Internet Is Making a Comeback After the Wall Street Journal decides to stop charging for content, Wired magazine editor Chris Andersen argues that "free" works best in a consumer-driven society.
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Why Free Internet Is Making a Comeback

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Why Free Internet Is Making a Comeback

Why Free Internet Is Making a Comeback

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Take a minute and think about how much is available to you every day online. I mean, you know, video and audio and text content from news sites like npr.org that keep you informed, or to buzzfeed.com that keeps you just simply entertained. Maybe you would download your favorite podcast or you friend somebody on Facebook. And what do all these things have in common? They are F-R-E-E, free, as in gratis, as in complimentary. So how does anybody actually make a buck online these days? And what if, heaven forbid, you attempt to charge for your content?

Chris Anderson is the editor-in-chief of Wired magazine and has a forthcoming book called "Free." It's also the cover story of the magazine's current issue, where you get 6,000 words of his book for free. So, hi, Chris.

Mr. CHRIS ANDERSON (Editor-in-Chief, Wired magazine; Author, "Free"): Hi, there. How are you?

STEWART: So I'm doing well. So while we all may believe this freeconomics is very 2.0, it's more like it's very 1895. Who used the free model to great success over a hundred-plus years ago?

Mr. ANDERSON: The long-time failure named King Gillette who, after bumbling around trying to find a way to make a fortune, was given two bits of good advice: Sell something that people throw away, and that if you could only give away one thing that required another, that he could build sort of almost a viral marketing mechanism. And so he invented the disposable razor and the disposable razor blade, and then later on gave away, you know, razors by the millions because he knew that they were useless without the blades. And that was - and that became his business. So the razor-and-blades model sort of defined free for most of the 20th century. You'd get a - you know, you'd get a cell phone for free and pay the minutes, or you'd, you know, the toasters for -you know, checking accounts and things like that.

STEWART: When did the game change? Was there one company that really changed it or one entity?

Mr. ANDERSON: I think it actually was a whole bunch of companies. It basically changed with the introduction of the Internet because, you know, for the first time, we had a marketplace where the underlying costs of almost everything digital online fall every year.

STEWART: This, however, did not stop certain entities from charging online. The Wall Street Journal tried it. The New York Times tried it, and then they had to backpedal and offer their content for free. Why did that fail?

Mr. ANDERSON: Because, you know, there's this - there's a basic law in economics that says in a competitive market, price falls to the marginal cost. Let me deconstruct that a little bit. The competitive market is the first answer to your question. These newspapers and other the publications who had a quasi-monopolies because they dominated the distribution channels. They had, you know, they had the trucks that got them out there. They had the huge printing plants. They had the access or they had the space on the newsstand. They were really almost the only way you could get information.

Those same economics that the Internet triggered 15 years ago created a huge, you know, flood of competing information. So it suddenly became a very competitive market.

Then the second part of the, you know, equation that, where you say, the price falls to the marginal cost, the cost of paper and trucks and ink was not falling. The cost of pixels and bits does fall, and so now these institutions were suddenly competing with an infinite number of other entities who were living in a world of falling costs, which is why the price inevitably went to zero.

STEWART: You point out, though, that just because products are free doesn't mean that someone somewhere isn't making huge gobs of money. Case in point: In Google, somebody's paying for that giant volleyball court in the middle of Mountain View on their campus.

Mr. ANDERSON: Exactly. And this is, you know, for us in the media industry, this is totally conventional. We understand the notion of giving our product away for free. I mean, we are now speaking on a radio station that's free to air. Much of television is free to air. You know, many newspapers and magazines are, if not free, subsidized to the point they might as well be free. So where did the money come from? A third party, and that's the advertiser. And so the notion of a three-party market where one party pays for the other to get the product for free is the basics - basis of the media model. It's the basis of the advertising model, and it has driven a lot of what's going on, what makes everything on the Internet free, and Google's entire revenue stream. Almost its entire revenue stream is driven by advertising built very much on the media model.

STEWART: We're speaking with Chris Anderson, who is the editor in chief of Wired magazine. He has a new book coming out called "Free."

You have six business models for a priceless - a free economy. Of the six models - I don't want to give them all away for free…

Mr. ANDERSON: Feel free.

(Soundbite of laughter)

STEWART: Tell me which one you find the most intriguing.

Mr. ANDERSON: The six are, you know - I will sort of disclose them quickly, 'cause it's all there on the Web site for free. There is a freemium, where if, you know, if you look online, you see this a lot - the basic service is free, and a tiny fraction of the customers will pay for a, you know, a version with more features, et cetera. So this is a kind of an inversion of the old free-sample model. You know, if it's muffins at Starbucks, they'll give away, you know, a tiny, tiny fraction of their muffins with the hopes of selling, you know, 99.9 percent of the others. Online, it's just the opposite. You give away 99.9 percent of your product for free on the hope that the 1.1 percent who pay will pay for everyone else. That's called freemium. Then you have advertising, which we've just talked about. You've got things like the music industry, where, you know, the sheer force of gravity - which is that, you know, the cost of, you know, copying music and distributing it online is zero - became so powerful that you couldn't fight it. And there is no business model. It's just music has become free and…

STEWART: Well, you know what it reminded of? When jam bands used to let you bootleg.

Mr. ANDERSON: Exactly. Yeah, yeah, the, you know, the Grateful Dead encouraging people to tape and distribute those tapes. I mean, basically, what that says is that music as a product may not have much of the business model. But music as performance, the concerts, has, you know, it remains a kind of a scarcity thing, and you - you know, you're seeing concert ticket prices rise, actually. So, that's a case where the sort of the, you know, the laws of economics just decided that the recorded music was, you know, wants to be free and will increasingly become free, but that's just great marketing for concerts and merchandise and licensing of the things that aren't free.

Then, I think, the two answers to your question that are most interesting are, one, which is labor exchange, where what you're giving is not your money, but your time or your efforts. And the best example of that is 411, Google 411. This is directory assistance on the phone. So with traditional directory assistance, you pay per minute for directory assistance. With Google's 411, it's free. Now, there's no advertising, so where - how do they make money? Well, it turns out that what you're doing is by pronouncing the names of, you know, stores or restaurants in your own accent, you're teaching their algorithms how to recognize those words. So you're training the machine. You're giving your labor for free to train their machines to do a better job. So you're creating something of value for them.

STEWART: Everybody wins.

Mr. ANDERSON: Everybody wins.

Then the last one - this is the one that's really, really kind of blown everyone's mind over the last five years - is what's called the gift economy. The gift economy is Wikipedia, it's Freecycle, where people, like, you know, exchange, you know, products for free rather than just send it to the dump. It is Craigslist. It's…

STEWART: I got rid of a hundred snow globes after my wedding.

Mr. ANDERSON: There you go.

STEWART: Yay, Craigslist. Make somebody's birthday party.

Mr. ANDERSON: It feels - it sounds very sort of '60s utopia in that people would just give things to each other for free, and yet it turns out to be the basis of perhaps the fastest growing part of the digital economy right now.

STEWART: When your book comes out next year, will you offer it in some form for free?

Mr. ANDERSON: I will. So, the article is - this month, is free online, as are all of our articles. And the magazine, we gave away, I think, 10,000 copies for free. The book is going to be free in every way we can make it. So the audio book, the e-book - you know, tied to specific readers like the Amazon Kindle or the Sony E-book Reader - is going to be free. Again, it cost me nothing. Why shouldn't it be free? So a Web book, you know, a version on the Web will probably be advertising support, much like my own magazine. And what we're talking about is whether it would be possible to make one of the physical books - you know, paper books, hard cover, whatever - be free by making it sponsored.

MARTIN: Chris Andersen is editor-in-chief of Wired magazine. Good luck with your book, Chris.

Mr. ANDERSEN: Thank you. Nice talking to you.

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